Readers Don't Hold Back On Tax Refund Question

HUMBERTO CRUZ ASK HUMBERTO

June 9, 2003|HUMBERTO CRUZ ASK HUMBERTO

Readers respond to my column on why taxpayers should avoid getting an income-tax refund. The reason: Getting a refund means you had too much money withheld from your paycheck all year, or you sent more money than needed in quarterly estimated tax payments.

Q: I do not completely agree with your column that getting a tax refund is a bad thing. While I agree that large refunds reflect lack of planning, I also think most people would still rather get a $2,000 refund than find out that they owe $200, particularly in today's economy.

In addition, it is nowhere near as easy as you imply to calculate your taxable income, especially when you are including things such as mortgage interest. Mortgage interest is not the same each year because you pay more of your interest in the early years. And estimating your taxes based on the mortgage interest you paid last year could cause you to underpay this year.

A: I too would rather find out that I am getting a check for $2,000, not that I need to send one for $300.

But your comment -- in particular, your choice of words -- misses my point. My point is that we don't have to wait until the last minute to "find out" whether we are getting a refund or we owe more money to the government.

Instead, we should know all along.

Here is how. At the beginning of each year, we should make a rough calculation of our tax liability for that entire year. (If you haven't done it for 2003 yet, why not do it now?) We would add all our anticipated income and factor in any deductions, exemptions or credits to which we are entitled.

Based on that estimate, even if it is just a ballpark figure, we can more intelligently decide how much money we want withheld from our paycheck, or how much money we need to send to the Internal Revenue Service in quarterly estimated tax payments.

The goal: To end the year as close to even as possible with the IRS.

I agree these calculations can turn out to be off the mark for many people, particularly those with erratic incomes or unanticipated deductions such as high medical expenses.

But I disagree that mortgage interest presents any great difficulty. Most lenders will give you an amortization table showing how much of each payment is interest, and how much a repayment of principal.

Q: I am a paid tax preparer and you are 100 percent right in saying most people are giving the government an interest-free loan with their money. You are also right in saying many people use their refund to pay bills when they could have paid those bills with the money they are having unnecessarily withheld all year, and could have saved the money on interest they are paying to their credit cards. The point where I disagree is your belief that most people are interested in tax planning. I offer to sit with my clients and discuss with them the amount of withholding they should take to come as close to even as possible at the end of the year. This advice falls on deaf ears 90 percent of the time. Most people say they are comforted knowing that they can look forward to an infusion of cash (in other words, the tax refund) in the future.

A: I think most people would be very interested in tax planning if they understood that (a) they would gain much greater control over their cash flow and overall finances and (b) such planning is not nearly as complicated as they think it is.

Here is one reader who understands:

Q: A recent column discussed income-tax refunds and the benefits from minimizing such interest-free loans to the government, which prodded me to ask you this question.

I have used a computer program to do my taxes for several years. This year it indicated I should begin paying estimated taxes for 2003, even though I had a refund of more than $1,600 for 2002. Why would it do that?

We received dividends from stocks and my wife has a small side business. However, taxes withheld from my salary at my job have always covered our tax bill, and I expect this to be true again for 2003.

A: Some computer programs offer to look at your anticipated income for the upcoming year to estimate your future tax liability. It seems that, after taking into account the stock dividends and your wife's anticipated business income for 2003, your program calculated you will owe money next year unless you begin making quarterly estimated payments.

But if you prefer, you can choose instead to increase the amount of money withheld from your paycheck, provided you are satisfied it will be enough.

For those not familiar with the term, quarterly estimated payments are payments the IRS requires four times a year of taxpayers who have taxable income but no money withheld from it, or at least not enough to satisfy IRS minimums. This group includes the self-employed, retirees receiving pension and investment income, or regular workers with additional side income from which no money is withheld for taxes.

In essence, taxpayers required to send quarterly payments (as self-employed, I am in that group) are forced to calculate their taxes four times a year. And that, as we have seen, is not all bad.

Humberto Cruz can be reached at AskHumberto@aol.com or c/o Tribune Media Services, 435 N. Michigan Ave., Suite 1500, Chicago IL 60611. Personal replies are not possible. Look for other columns by Humberto Cruz in Sunday's Health and Family and Monday's Your Business sections.